Which is Better Term or Whole Life Insurance?
Term Life Insurance vs Whole Life Insurance, there are many differences between the two. Specifically when it comes to cost of life insurance, coverage length, cash value growth, living benefits and many other things.
Before shopping for life insurance coverage – or before going forward with the purchase of a policy – it is important to learn the difference in term life vs whole life insurance.
Why does this really matter?
There are several good reasons for this. Even though both are life insurance policies the benefits that are offered can differ substantially.
So, having an in-depth understanding of the different types of life insurance coverage – and how they work – can be highly advantageous in a number of ways.
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Whole Life vs Term Life Insurance Coverage
Unlike many years ago, today there is a long list of different types of coverage that are available.
Because of the many “bells and whistles” that can be attached, today’s life insurance policies can essentially be “customized” to fit just about any need.
But when you really drill down, there are still just two primary categories. These are term life insurance and permanent.
Term life insurance is pretty basic, bare-bones life insurance coverage.
Whole life insurance which is a permanent policy, on the other hand, offers both death benefit protection, as well as cash value.
This cash value build-up can help you to save money in a tax-advantaged way – along with providing your loved ones with financial protection, just in case.
There are several different types of permanent life insurance options to choose from. These include the following:
- Whole Life Insurance
- Universal Life Insurance
- Indexed Universal Life Insurance
- Variable Life Insurance
- Variable Universal Life Insurance
And, within each of these types are even more specific policy options available. Let’s take a look at term vs whole life insurance coverage.
Term Life Insurance Definition
Term life insurance is considered to be the most “basic” form of life insurance coverage. One of the primary reasons for this is because it offers pure death benefit protection only, without any type of cash value or savings build up within the policy.
Because of this, it can be extremely affordable, and it can provide you with a viable way to obtain a large amount of life insurance coverage at a low premium rate – particularly if you are young and/or in relatively good health at the time you apply for the policy.
Just as its name suggests, term life insurance is purchased – and it will remain in force – for certain time periods, or “terms.”
These coverage options may include 5 years, 10 years, 20 years, 25 years, or even 30 years. There is also a one-year renewable term life insurance option.
Usually, companies will offer several of these term lengths in their product selection. So, depending on the actual need that you’re covering, one may be better than another.
For example, term life insurance is considered by many to be “temporary” coverage. With that in mind, term can be more beneficial for certain types of temporary needs.
These could include the payoff or a mortgage balance or ensure that a child or grandchild has enough money to attend college in the future.
While term life insurance is a fairly basic form of coverage, there are actually several variations of this type of insurance. These can include the following:
Level Term – Level term life insurance has a death benefit that will remain the same (i.e. level) throughout the entire coverage term. Typically, the premium will also stay the same during the policy’s period of coverage.
Renewable Term – A renewable term policy is able to be renewed by the insured when the coverage period ends. The premium, however, will usually go up with each renewal. This is due to the insured’s older age at that time.
Convertible Term – Convertible term life can be converted over into a permanent insurance policy at a future time. This can often be done without providing evidence of insurability. Or in many cases, without having to take another medical exam.
Increasing Term – As its name implies, increasing term will have a rising death benefit over time. But oftentimes, the premium will remain the same.
Decreasing Term – Decreasing term has a death benefit that gets lower over time. The premium, however, will often remain the same on these plans. Why consider this? Well, this type of term insurance could be good for covering a decreasing mortgage balance over a period of years. In this case, the amount of insurance coverage would decrease as the mortgage balance also goes down.
Who Should Consider Term Life Insurance?
While term life has many advantages, it may not be ideal for everyone. So, who may be a good candidate for this type of coverage?
Just some of the candidates may include those who:
- Want a large death benefit, but at an affordable price
- Only need coverage for a certain amount of time
- Have budget constraints, but want to ensure that loved ones have financial security in the future
- Plan to convert over to a permanent policy at a later date
Term Life Insurance Pros and Cons
Depending on what it is that you’re looking for in a policy, term insurance can be the ideal product. Or, it could alternatively be a waste of your premium dollars.
Given that, there can definitely be both pros and cons of term life insurance.
Some of the advantages of term life include the following:
- Ability to convert to permanent coverage
- Level premiums and death benefit (on many term policy options)
Likewise, there may be some disadvantages with term life insurance. These can include:
- Limited duration for coverage
- Premium can be much higher if / when the policy is renewed
- Policy could expire, even if the insured still needs the coverage
Whole Life Insurance Definition
For those who are seeking more permanent life insurance protection, there are numerous options. One of which is whole life insurance.
Whole life coverage is often referred to as the most common type of permanent life insurance protection. One reason for this is because whole life offers a guaranteed death benefit.
This type of coverage also cannot be canceled – provided that the premium is paid. This is the case, even if the insured contracts an adverse health condition.
It also offers premiums that are guaranteed not to increase. Again, this is true even as the insured gets older, and if they are diagnosed with a serious health condition.
Whole life insurance also offers a cash value component. Within this portion of the policy, funds are allowed to grow on a tax-deferred basis.
This can help to build up a nice amount of savings over time, because there is no tax due on the growth of these funds until (or unless) they are withdrawn.
Money from the policies cash value can be withdrawn or borrowed by the policyholder. This can be done for any reason and requires no approval from the insurer.
Cash from a whole life insurance policy, then, could be used for a number of reasons. These may include:
- Paying off high-interest debt
- Purchasing large ticket items like vehicles
- Supplementing retirement income in the future
The loans that are taken from a whole life insurance policy are not required to be repaid. But if they are not, the unpaid balance – plus interest – will be deducted from the death benefit that is paid out to the beneficiary.
Participating vs non participating life insurance
Just as there is with term life insurance, there are several types of whole life. These can include participating vs. non participating).
With a participating whole life insurance policy, the policyholder can receive dividends from the insurance company. While dividends are not guaranteed, there are some mutual insurers that have paid them out consistently for many years. Some even for more than a century.
Dividends can be received in a number of ways. For example, they can be added to the policy’s cash value. Alternatively, they may be used for purchasing additional amounts life insurance for the insured.
Another key benefit with dividends on whole life is that they are not taxed. Unlike participating policies, non-participating whole life insurance policies will not pay out a dividend.
Who is a Good Candidate for Whole Life Insurance?
Given its features and benefits, whole life can be a great option for some who may want to build cash value or have a policy that last your entire life, while the higher priced premium can be a turn-off for others.
So, who might want to consider going with permanent insurance?
Some good candidates could include those who are:
- Looking for protection for their entire lifetime
- Want to build up tax-advantaged savings, while at the same time ensuring protection
- Want the assurance of a guaranteed premium amount
Also, want the assurance of a guaranteed death benefit – even in the event of illness down the road.
Whole Life Insurance Pros and Cons
There can be several advantages and disadvantages with whole life insurance.
So, even though there are some nice features, these policies are not ideal for everyone.
Some of the pros of whole life insurance coverage include:
- Level – and guaranteed – death benefit
- Level premium for the life of the policy
- Cash value build up
- Dividends (on participating policies)
- Coverage cannot be canceled (unless the premium is not paid)
There can also be a few cons with whole life insurance, such as:
- Higher premiums than term insurance (with all other factors being equal)
- Cash value can take some time to grow (and it may even be negative in the initial years of the policy)
Term and Whole Life Insurance Riders
Both term and whole life insurance can often offer you the ability to add riders. This means that you can add additional coverage – or even additional people to be insured.
Some of the more common riders that you may see on policies include:
Guaranteed Insurability Rider – This rider allows you to obtain additional insurance protection without providing evidence of insurability. (This usually means that there is no medical exam required).
Accidental Death Rider – The accidental death rider is sometimes referred to as a double indemnity rider. This rider will pay out an additional sum if the insured dies as the result of a covered accident. It may also be necessary that the insured die within a certain time period of the accident, such as 90 days.
Waiver of Premium Rider – The waiver of premium rider can allow an insured to stop paying premiums if he or she becomes disabled. This rider can essentially keep the policy in force – even if the insured is no longer able to pay their premium.
Children’s Term Rider – This rider provides term insurance on a child. It typically specifies that the death benefit will pay out if the child dies before they reach a certain age. In some cases, once the child turns a certain age, they may be able to convert the coverage over into their own policy. This can often be done without providing evidence of insurability.
Return of Premium Rider – With this rider, used with term life insurance, the insured can get back some or all of their paid-in premiums. This is the case if the insured outlives the stated term of the life insurance policy. (There is usually an added cost for this rider).
Where to Find the Best Premiums
Shopping for life insurance can be confusing. Especially when trying to compare term and whole life insurance policies. You can see above we have build a special whole life vs term life insurance calculator where you can see the difference in cost.
But the truth is that it shouldn’t be.
This type of coverage can mean the difference between those you love moving forward financially or having to drastically change their lives in the event of the unexpected.
Coverage should also ideally fit into your overall budget. Otherwise, if the premium gets to be too much, you may end up canceling your coverage – which in the end, will not be beneficial to anyone (except maybe the insurance company).
So, how can you find the best rates on term and whole life insurance?
The best way is to work with an independent agency or brokerage.
In doing so, you will be able to get unbiased advice, along with premium quotes from multiple life insurance companies.
By being able to look at different policy features – as well as premium quotes – you can make a much more well-informed decision about which plan may be right for you.
The Bottom Line – Which is better
Insurance can be a key component of most any good financial plan. It can provide you with a number of financial solutions throughout the different stages of y